Bad Blood

Secrets and Lies in a Silicon Valley Startup

by John Carreyrou

Bad Blood tells the story of the rise and fall of Elizabeth Holmes and her startup Theranos. The company claimed to revolutionize the blood testing industry with its technology. But in the end, the author – a journalist at the Wall Street Journal – uncovered the company as a fraud.

I found Bad Blood a fascinating story. And from time to time I had to shake my head, so crazy were some of the things that happened. However, I didn't like much the writing style of the author. A bit confusing were all the different names, combined with the inconsistent use of them by the author: sometimes he used the first name, other times the last name.

My notes

Prologue

Elizabeth had asked him [Henry Mosley, chief financial officer] to put together some financial projections she could show investors. The first set of numbers he'd come up with hadn't been to her liking, so he'd revised them upward. He was a little uncomfortable with the revised numbers, but he figured they were in the realm of the plausible if the company executed perfectly. Besides, the venture capitalists startups courted for funding knew that startup founders overstated these forecasts.

Elizabeth was often upbeat. She had an entrepreneur's boundless optimism. She liked to use the term "extra-ordinary", with "extra" written in italics and a hyphen for emphasis, to describe the Theranos mission in her emails to staff.

At first, Shaunak [Roy, Theranos co-founder] professed not to know anything. But Mosley sensed he was holding back and kept pressing him. Shaunak gradually let down his guard and allowed that the Theranos 1.0, as Elizabeth had christened the blood-testing system, didn't always work. It was kind of a crapshoot, actually, he said. Sometimes you could coax a result from it and sometimes you couldn't. This was news to Mosley. He thought the system was reliable. Didn't it always seem to work when investors came to view it? Well, there was a reason it always seemed to work, Shaunak said. The image on the computer screen showing the blood flowing through the cartridge and settling into the little wells was real. But you never knew whether you were going to get a result or not. So they'd recorded a result from one of the times it worked. It was that recorded result that was displayed at the end of each demo.

[Mosley] brought up what Shaunak had told him about the investor demos. They should stop doing them if they weren't completely real, he said. "We've been fooling investors. We can't keep doing that." Elizabeth's expression suddenly changed. Her cheerful demeanor of just moments ago vanished and gave way to a mask of hostility. It was like a switch had been flipped. She leveled a cold stare at her chief financial officer. "Henry, you're not a team player", she said in an icy tone. "I think you should leave right now." There was no mistaking what had just happened. Elizabeth wasn't merely asking him to get out of her office. She was telling him to leave the company – immediately. Mosley had just been fired.

A Purposeful Life

When she was nine or ten, one of her relatives asked her at a family gathering the question every boy and girl is asked sooner or later: "What do you want to do when you grow up?" Without skipping a beat, Elizabeth replied, "I want to be a billionaire."

There were pictures around the house of [her father] providing disaster relief in war-torn countries. The message Elizabeth took away from them is that if she wanted to truly leave her mark on the world, she would need to accomplish something that furthered the greater good, not just become rich. Biotechnology offered the prospect of achieving both.

"No, Dad, I'm not interested in getting a Ph.D., I want to make money."

That spring, she showed up one day at the door of Batson's dorm room and told him she couldn't see him anymore because she was starting a company and would have to devote all her time to it.

MedVenture Associates wasn't the only venture capital firm to turn down the nineteen-year-old college dropout. But that didn't stop Elizabeth from raising a total of nearly $6 million by the end of 2004 from a grab bag of investors.

The Gluebot

The main difficulty stemmed from Elizabeth's insistence that they use very little blood. She'd inherited from her mother a phobia of needles; Noel Holmes fainted at the mere sight of a syringe. Elizabeth wanted the Theranos technology to work with just a drop of blood pricked from the tip of a finger.

Ed [Edmond Ku] was working late one evening when Elizabeth came by his workspace. She was frustrated with the pace of their progress and wanted to run the engineering department twenty-four hours a day, seven days a week, to accelerate development. Ed thought that was a terrible idea. His team was working long hours as it was. He had noticed that employee turnover at the company was already high and that it wasn't confined to the rank and file. Top executives didn't seem to last long either. Henry Mosley, the chief financial officer, had disappeared one day. There was a rumor circulating around the office that he'd been caught embezzling funds. No one knew if there was any truth to it because his departure, like all the others, wasn't announced or explained. It made for an unnerving work environment: a colleague might be there one day and gone the next and you had no idea why. Ed pushed back against Elizabeth's proposal. Even if he instituted shifts, a round-the-clock schedule would make his engineers burn out, he told her. "I don't care. We can change people in and out", she responded. "The company is all that matters."

[...] she wasn't happy when Ed refused to make his engineering group run 24/7. From that moment on, their relationship cooled. Before long, Ed noticed that Elizabeth was making new engineering hires, but she wasn't having them report to him. They formed a separate group. A rival group. It dawned on him that she was pitting his engineering team and the new team against each other in some corporate version of survival of the fittest.

Apple Envy

To anyone who spent time with Elizabeth, it was clear that she worshipped Jobs and Apple. She liked to call Theranos's blood-testing system "the iPod of health care" and predicted that, like Apple's ubiquitous products, it would someday be in every household in the country.

Bissel and Lortz had the company's computer network set up in such a way that information was split into silos, hampering communication between employees and departments. You couldn't even exchange instant messages with a coworker. The chat ports were blocked. It was all in the name of protecting proprietary information and trade secrets, but the end result was hours of lost productivity.

To entice people into working longer days, she had dinner catered every evening. The food often didn't arrive until eight or eight thirty, which meant that the earliest you got out of the office was ten.

One aspect of Matt's job had become increasingly distasteful to him. [...] Every time Elizabeth fired someone, Matt had to assist with terminating the employee. Sometimes, that meant more than just revoking the departing employee's access to the corporate network and escorting him or her out of the building. In some instances, she asked him to build a dossier on the person that she could use for leverage. There was one case in particular that Matt regretted helping her with: that of Henry Mosley, the former chief financial officer. After Elizabeth fired Mosley, Matt had stumbled across inappropriate sexual material on his work laptop as he was transferring its files to a central server for safekeeping. When Elizabeth found out about it, she used it to claim it was the cause of Mosley's termination and to deny him stock options.

The night before that second meeting, Susan and Elizabeth had pricked their fingers for two hours in a hotel in Zurich to try to establish some consistency in the test results they were getting, to no avail. When they showed up at Novartis's Basel offices the next morning, it got worse: all three Edison readers produced error messages in front of a room full of Swiss executives. Susan was mortified, but Elizabeth kept her composure and blamed a minor technical glitch.

After some discussion, the four men [of the board] reached a consensus: they would remove Elizabeth as CEO. She had proven herself too young and inexperienced for the job. [...] They called in Elizabeth to confront her with what they had learned and inform her of their decision. But then something extraordinary happened. Over the course of the next two hours, Elizabeth convinced them to change their minds.

The Childhood Neighbor

Dr. J

Hunter was beginning to grow suspicious. With her black turtleneck, her deep voice, and the green kale shakes she sipped on all day, Elizabeth was going to great lengths to emulate Steve Jobs, but she didn't seem to have a solid understanding of what distinguished different types of blood tests. Theranos had also failed to deliver on his two basic requests: to let him see its lab and to demonstrate a live vitamin D test on its device. Hunter's plan had been to have Theranos test his and Dr. J's blood, then get retested at Stanford Hospital that evening and compare the results. [...] But Elizabeth claimed she'd been given too little notice even though he'd made the request two weeks ago.

Hunter thought the whole thing was bizarre. Walgreens had brought him here to vet Theranos's technology, but he hadn't been allowed to do so. The only thing they had to show for their visit was an autographed flag.

The miniLab

Instead of building new instruments from scratch to fit the arbitrary dimensions Elizabeth had laid out, Greg [Baney] felt they would do better to take the off-the-shelf components they were laboring to miniaturize and integrate them together to test how the overall system worked. Once they had a working prototype, they could then worry about shrinking it. Emphasizing the system's size first and how it worked later was putting the cart before the horse. But Elizabeth wouldn't budge.

Nepotism at Theranos took on a new dimension in the spring of 2011 when Elizabeth hired her younger brother, Christian, as associate director of product management. Christian Holmes was two years out of college and had no clear qualifications to work at a blood diagnostics company, but that mattered little to Elizabeth. What mattered far more was that her brother was someone she could trust.

When he first arrived at the company, Christian didn't have much to do, so he spent part of his days reading about sports. He hid it by cutting and pasting articles from the ESPN website into empty emails so that, from afar, it looked like he was absorbed in work-related correspondence.

The Wellness Play

-

"Who Is LTC Shoemaker?"

Ian fit the stereotype of the nerdy scientist to a T. He wore a beard and glasses and hiked his pants high above his waist.

Elizabeth's loose relationship with the truth was another point of contention. Ian had heard her tell outright lies more than once and, after five years of working with her, he no longer trusted anything she said, especially when she made representations to employees or outsiders about the readiness of the company's technology.

Per Sunny's instructions, any materials Theranos provided to Chiat\Day had to be numbered, logged, and kept in a locked room that only the team assigned to work on the account had access to. Any printing had to be done on a dedicated printer inside the room. Discarded materials couldn't just be thrown away, they had to be shredded. Computer files had to be stored on a separate server and could only be shared among the team via a dedicated intranet. And under no circumstances were they to share information about Theranos with anyone from Chiat\Day's L.A. office or the agency's broader network who hadn't signed a confidentiality agreement.

Going Live

Elizabeth and Sunny regarded anyone who raised a concern or an objection as a cynic and a naysayer. Employees who persisted in doing so were usually marginalized or fired, while sycophants were promoted.

Sunny, in fact, had the master-servant mentality common among an older generation of Indian businessmen. Employees were his minions. He expected them to be at his disposal at all hours of the day or night and on weekends. He checked the security logs every morning to see when they badged in and out. Every evening, around seven thirty, he made a fly-by of the engineering department to make sure people were still at their desks working.

With time, some employees grew less afraid of him and devised ways to manage him, as it dawned on them that they were dealing with an erratic man-child of limited intellect and an even more limited attention span. Arnav Khannah, a young mechanical engineer who worked on the miniLab, figured out a surefire way to get Sunny off his back: answer his emails with a reply longer than five hundred words. That usually bought him several weeks of peace because Sunny simply didn't have the patience to read long emails.

Elizabeth told the gathered employees that she was building a religion. If there were any among them who didn't believe, they should leave. Sunny put it more bluntly: anyone not prepared to show complete devotion and unmitigated loyalty to the company should "get the fuck out".

Unicorn

-

The Grandson

-

Fame

Theranos had raised more than $400 million from investors at a valuation of $9 billion, making it one of the most valuable startups in Silicon Valley.

Under the headline "Bloody Amazing", the [Forbes] article pronounced [Elizabeth] "the youngest woman to become a self-made billionaire".

With the explosion of media coverage came invitations to numerous conferences and a cascade of accolades. Elizabeth became the youngest person to win the Horatio Alger Award. Time magazine named her one of the one hundred most influential people in the world. President Obama appointed her a U.S. ambassador for global entrepreneurship, and Harvard Medical School invited her to join its prestigious board of fellows.

Her emergence tapped into the public's hunger to see a female entrepreneur break through in a technology world dominated by men.

In Elizabeth Holmes, the Valley had its first female billionaire tech founder.

Part of what made Elizabeth's persona so compelling was her heartwarming message about using Theranos's convenient blood tests to catch diseases early so that, as she put it in interview after interview, no one would have to say goodbye to loved ones too soon.

The Tip

When I stopped to think about it, I found it hard to believe that a college dropout with just two semesters of chemical engineering courses under her belt had pioneered cutting-edge new science. Sure, Mark Zuckerberg had learned to code on his father's computer when he was ten, but medicine was different: it wasn't something you could teach yourself in the basement of your house. You needed years of formal training and decades of research to add value.

What worried him [Alan Beam, former laboratory director of Theranos] even more than any personal liability he might face was the potential harm patients were being exposed to. He described the two nightmare scenarios false blood-test results could lead to. A false positive might cause a patient to have an unnecessary medical procedure. But a false negative was worse: a patient with a serious condition that went undiagnosed could die.

Holmes and her company had overpromised and then cut corners when they couldn't deliver. It was one thing to do that with software or a smartphone app, but doing it with a medical product that people relied on to make important health decisions was unconscionable.

The Ambush

-

Trade Secrets

The Theranos delegation that came to the Journal's offices was made up mostly of lawyers.

La Mattanza

[Sunny] Balwani had tasked a Theranos software engineer named Michael Craig to write an application for the miniLab's software that masked test malfunctions. When something went wrong inside the machine, the app kicked in and prevented an error message from appearing on the digital display. Instead, the screen showed the test's progress slowing to a crawl.

During demos at headquarters, employees would make a show of placing the finger-stick sample of a visiting VIP in the miniLab, wait until the visitor had left the room, and then take the sample out and bring it to a lab associate, who would run it on one of the modified commercial analyzers.

Negative Glassdoor reviews about the company weren't unusual. Balwani made sure they were balanced out by a steady flow of fake positive reviews he ordered members of the HR department to write.

Damage Control

In a windowless war room [...] Holmes and her communications consultants discussed strategies for how to hit back against my reporting. One approach she favored was to portray me as a misogynist. To generate further sympathy, she suggested she reveal publicly that she had been sexually assaulted as a student at Stanford. Her advisers counseled against going that route, but she didn't abandon it entirely. In an interview with Bloomberg Businessweek, she suggested she was the victim of sexism.

[...] her old Stanford professor [...] dismissed questions about the accuracy of Theranos's testing as absurd [...] He also maintained that Holmes was a once-in-a-generation genius, comparing her to Newton, Einstein, Mozart, and Leonardo da Vinci.

The Empress Has No Clothes

This was major. The overseer of clinical laboratories in the United States had not only confirmed that there were significant problems with Theranos's blood tests, it had deemed the problems grave enough to put patients in immediate danger.

As for the lab itself, it was a mess: the company had allowed unqualified personnel to handle patient samples, it had stored blood at the wrong temperatures, it had let reagents expire, and it had failed to inform patients of flawed test results, among many other lapses.

Most of the other investors opted against litigation, settling instead for a grant of extra shares in exchange for a promise not to sue. One notable exception was Rupert Murdoch. The media mogul sold his stock back to Theranos for one dollar so he could claim a big tax write-off on his other earnings. With a fortune estimated at $12 billion, Murdoch could afford to lose more than $100 million on a bad investment.